Pricing and investing in co-creation with customers for a duopoly

Abstract Customers participating in the firm's product co-creation can discern the precise valuation about the product before actual consumption and get a potential benefit which encourages them to buy the products they have co-created. This observation prompts firms to lower participation costs via customer co-creation investment (CCI) and attract customers to participate in their co-creation; meanwhile, provides the opportunity for them to practice discriminatory pricing based on customer's participation behavior. In an experience good duopoly, we investigate the firms' co-creation strategy, which interacts with their CCIs and pricing, via a game-theoretical approach. We find that co-creation can lead to less profits, especially if firms have a higher ability to change investment into lower customer's participation cost, which is counterintuitive, caused for competition. Besides, co-creation can lead to a higher social welfare when the probability of customer's high valuation is relatively high; otherwise, it leads to a lower one. Within co-creation, the application of price discrimination can effectively alleviate competition and bring firms more profits when customer's ex-ante valuation is more likely to be high; otherwise, it will hurt firms. Price discrimination can enhance the social welfare when the probability of customer's high valuation is relatively low; otherwise, it will decrease the social welfare.